MaxLinear, Inc. (MXL) Earnings Call Transcript & Summary

Good afternoon, everybody. Sorry for a little technology issues in the background here. But we are on with Steve Litchfield, the Chief Corporate Strategy Officer and CFO of MaxLinear. Steve, thank you for your patience in making that technology work for the audience. It was definitely on the DB's side, not Steve's side.

So I guess, a high-level question for you, in general, Steve, and that is the business that you acquired from Intel, I think, literally couldn't have been better-timed as far as what's happened and work-from-home and everybody increasing their broadband. So talk a little bit about where you are in that integration process? How sustainable -- and how sustainable do you believe the demand is in that segment, because it's been growing very, very nicely ever since you bought it.

Sure. Yes. Thanks, Ross. Thanks, everybody, for joining us today. Look, I agree. I mean, I think our timing was good. It was quite painful to negotiate the deal during a pretty difficult COVID environment, but we did get that done. Integration-wise, it's going extremely well. I think the team has done an exceptional job in a pretty difficult environment. And we've made really good progress. I mean with regard to the business itself, I definitely have seen things pick up quite dramatically. Keep in mind, I mean, for those unfamiliar, the business that we knew extremely well. We were selling into the same end application, or in a lot of cases, that same gateway. We were selling a front-end chip and they were selling an SoC chip. And so we knew the team extremely well. We knew the application. We knew the customers. And so we were able to come up to speed very quickly. What's going on with regard to the business itself and the market, so this is where broadband -- our broadband and connectivity business really combines the Intel products as well as the MaxLinear products has gone well. Last week, we saw -- I mean, last week -- last year, saw a big pickup early on, probably a little higher than what our original expectations were when we announced the deal, right? But in reality, it was reasonably in line with where the business had performed. And then since then, I mean, we've seen a lot of our operators -- the cable operators, but also some of the carriers and kind of worldwide broadband deployments. Upgrades have absolutely continued to increase. You're seeing these guys kind of double down on some of their CapEx needs as far as deploying this. I think you've really seen a shift in their priorities. Historically, they've been kind of focused around content drivers and the like. And now I think really recognizing that a lot of the services that are available within the home, some of these monthly subscriptions that they would like to capture. In order to do that, they've got to upgrade some of these networks. And so as they look out over the next couple of 3 years, you're seeing a much bigger CapEx investment being made in all different mediums, right? I mean whether it be upgrading DSL at the low end, but they're upgrading cable, they're upgrading fiber, they're doing fixed wireless access. And so now we're able to address all of that, right? Historically, we've done primarily cable. But now we've absolutely got our -- a lot of things going on in the fiber side, some things going on in the fixed wireless access side, DSLs being upgraded. Behind all that, we also have a lot of government infrastructure moneys gone into this RDOF. You've kind of seen that over the last 12 months. Now you've got this Biden infrastructure plan. I think that's subsidizing some of the investments that these guys are making. So that's definitely helping out as well. So all in all, the market has done extremely well. I guess I'll maybe take the opportunity, Ross, if you don't mind. One other thing that I think has been very interesting post acquisition is the customer relationship that we have with these operators and carriers has been extremely good. And I think just strengthened, and I think it really speaks to the platform that we have, and to some degree, maybe the environment that these guys have been through, right? So they have had kind of trusted that the ecosystem and the supply chain was all working fabulously. And in fact, it turns out it was pretty fragile, right? And I think we've really seen kind of an about-face on that front. We've seen strengthening relationships with our carrier and operator friends. And they're really stepping up, right? I mean they're making long-term commitments to share. They're making long-term commitments in the form of NRE payments or to make investments or aligning road maps road for the future. And so it's a pretty exciting time, very meaningful time to us.

So with that acquisition, nothing against the former owner of that asset, but it really wasn't their priority in life. They had some bigger fish to fry, so to speak. Are the customers excited to have a company like MaxLinear, albeit much smaller than Intel, of course, but is much, much more focused on this business? And is that playing a part in these longer-term relationships as well?

Well, I think it is, and it kind of goes along those lines. It's a good point you make. I think they definitely recognize, I mean, the fragileness of the supply chain. They recognize they've only got 2 guys. They used to have many more, right? And now they don't have that. They're tied to -- they were tied to Broadcom and Intel. There's been rumors Broadcom's commitment, they're really positioned as a software company now. They see Intel exit. And so I think they're relooking at everything, and I think they do recognize that we are a long-term partner, and we are committed. So I think that definitely plays a big role, Ross.

So if we put a pin in that broadband segment, because I want to come back to it for a minute.

Yes, yes, absolutely.

Another topic that I should have started with was the supply side of the equation, I've asked every company about. How are you guys viewing supply? And it's limited and tight across many different vectors for most companies. But how are you guys feeling about your ability to supply the demand that's out there? And if you have shortages or constraints, which of these end market segments are they more -- most acute?

Yes. So look, I mean, we're seeing the supply challenges just like our peers. We've been seeing this since what, Q4 of last year. I think we've done a reasonably good job. Our ops team has been fabulous, and they've worked very hard kind of working through that, getting additional supply for our customers. I think we've done a relatively good job. We're still behind, a lot of catching up to do. I think as you think about the industry as a whole, I mean, when is this going to subside? I mean, we've been actually been able to see improvements, no doubt about that. We've seen increases that we've been able to get out of production. So that's encouraging. I think we will continue to see increases throughout the rest of this year and into next year as well. I think -- I mean, we still have challenges. Wafers have not been a huge issue. We've been really more back-end constrained, although we've gotten through a lot of that. Now there's still substrate challenges out there. We're definitely seeing those. And I think that's going to continue for some time. And wafers, I think we will still have bumps along the road even through the first half of next year. But I'm encouraged. I think we've been doing a pretty good job. We're also looking, continuing to bring on new suppliers. We're moving some product around a little bit. That's alleviating some of the constraints that we have. So I expect that will continue through the rest of this year and the first half of next year as well. So by shifting to a new supplier, we're often able to free up some capacity. And then in some cases, we're also able to reduce some costs as well.

Got it. So if you were going to say an equilibrium was going to be attained, generally speaking, for MaxLinear specifically, it sounds like, one, you're handling it relatively well as it is, but two, sometime middle of next year?

Yes. Well, I mean, look, I think -- maybe I'll put it a little bit differently, Ross. If I look at the demand next year, I mean we've got a very meaningful growth rate coming next year kind of based on what I talked about earlier, some of these newer platforms that are ramping, the newer customers. We have some new products as well that are ramping. And all those customers were designed in and they've got big ramps that are scheduled, and so they want to make sure that they're able to hit that. And so I think we're going to be able to hit that ramp next year and be able to satisfy that level of demand. I don't know when. Is it mid next year? Is it Q2? Is it Q1? Is it Q3? I'm not really sure. I think we're going to have some bumps in the first half of next year. But I think it's going to continue to move up. I mean, I think we will see improvements, but probably not completely alleviated until maybe the second half of next year.

Got it. Okay. Let's get back to the broadband side of things, because that's 55-roughly-percent of your business right now. So if you have big growth aspirations for next year, I would assume that some of that at least has to occur in the broadband side of things. So I can see there -- from my perspective, and correct me if I'm wrong, there could be some offsetting trends where if work-from-home reverses itself, those tailwinds slow, that would be the headwind, relatively speaking. But then share gains, longer-term supply agreements, upgrades in technology, government spending, those things could be some tailwinds for you. So for that 55% of the business, what do you think the growth rate -- what's a sensible growth rate? Or what do you view to be the positives and negatives as you look into 2022?

Yes. I mean, look, between broadband and connectivity, I mean, we're definitely seeing double-digit growth next year. The box level business where we're seeing improvements, I mean, we're seeing the cable guys continuing to invest. The fiber opportunities are all new to us. We just won a big North America carrier that's expected to ramp in the first half of next year. That's really encouraging. And keep in mind, Ross, I mean, all this is WiFi content, and we've talked specifically about this, right? We're seeing a doubling of content, which kind of puts you to north of 50 this year, and then you'd probably see that double again next year. So there's a big growth rate coming from WiFi. That's just attached, right? I mean that's just -- with all the new platforms that we're shipping, not only are they getting the $15 of a front end on an SoC, now they're getting a WiFi -- multiple WiFi chips and the Ethernet chip, right? And so that's kind of the -- I've always described as that low-hanging fruit, right? That attach is very easy for us to capture. So anything that we're shipping now has $30 worth of content versus $15 worth of content. And so that will be a meaningful part and why we have confidence in that growth next year.

And when you have that attach rate increase, what was the former solution? Was it a mix and match where you guys had the back end and the front end, but the connectivity came from one of your competitors, but now it's all under one roof?

That's right. Yes. So the connectivity was a third party. So like in a lot of -- I mean, the best example I can give is like a Quantenna, right? Quantenna, for years, had been that third-party supplier, supplied a lot into a lot of the same markets that we supply into today. And ultimately, they didn't have an SoC, and this entire customer base wanted to move to a solution where they could depend on one guy. And so that's why they had been pushing. That's why they like the Broadcom solution. That's why they like the MaxLinear solution today is because we can provide the SoC. And it has really the tight coupling between the SoC and the WiFi solution. So that's the reason that the operators wanted to move in that direction. So they -- ultimately, that design process started, call it, 1.5 years, 2 years ago. And so now you're seeing that kind of come to fruition today. So they had relied on, say, a Quantenna in the past, and now they're using a MaxLinear solution.

And is the solution that you're bringing, why wasn't it used before? I mean, nothing against the MaxLinear side, but you have only owned this asset for a year. Have you guys really enhanced the connectivity side?

No, no, no. I mean this was -- so Intel just -- they had a -- they were late to market with the Wi-Fi 5 solution, but it just really didn't ever get any meaningful traction in the market. So they had a Wi-Fi 6 solution. Wi-Fi 6 really -- I mean the whole industry really didn't start shipping until the second half of last year. So that is just beginning. Now I mean what did MaxLinear do? I mean, the combined teams have continued to work together and didn't miss a beat so that we could ramp these programs, but there wasn't necessarily something unique that we did that Intel had not done. I mean the work was done, the early -- the engineering teams, the marketing teams had worked with customers to be prepared for that ramp. I mean, we've got to continue to support, from a software standpoint, that platform solution, which we are doing.

Got it. So when I think about it, it sounds like the confidence you have in revenue growth, you combine broadband and connectivity together in your answer, which is fine. But it sounds like to the extent you're delineating them in your reporting structure, a lot more is going to come on the connectivity side because of those content gains. How do you -- what happens on the broadband side? And again, I only ask because that's such a huge part of the business.

No, no. I mean, that's growing too, right? I mean we're definitely seeing growth out of that side. I mean I just talked about the increased wins that we're getting, the market share gains that we're winning, talked about the fiber business that historically the company didn't have. So those are 2 or 3 areas as to why the broadband business is -- the broadband kind of box business is growing, right, and these build-out, these infrastructure upgrades that are happening in broadband, we're absolutely participating there, along with the WiFi and Ethernet, which is really new content.

Got you. Okay. That's great to hear. Any of the other aspects of connectivity doing anything interesting? Or is it the WiFi and Ethernet are the main things, and the content increases and attach rates in the box are really what you want to focus on?

Yes. I mean -- well, I mean those are the bigger components, right? I mean if you look at connectivity, I mean, I think I don't know where you modeled it. But I mean it's a very substantial growth this year. I mean it's probably up in the couple hundred million dollar range next year. I mean -- and as I spoke earlier, I mean half of that is driven by WiFi, I mean you've still got a big chunk coming from Ethernet. You've still got MoCA and G.hn, which we've talked about G.hn continue to perform well. Smaller dollar amount, but the growth has been very good. And MoCA, we ramped last year with Verizon a number of really nice wins on the MoCA side. That has continued to perform extremely well. So yes, connectivity across the board is going well.

So why don't we pivot over to the infrastructure side. That's been an area. It's roughly 15% of your business this year. That's been a business that has had extreme lumpiness. A lot of it through no fault of your own, when guys like Huawei are supposed to ramp, but the government doesn't allow it to ramp. And then 5G and data center customers are inherently lumpy themselves. Let's talk about the wireless side of that, the 5G portion. That, I think, was a huge driver in the sequential growth earlier this year. Talk about what those drivers are on both the access and the transceiver side of the equation, and how should investors think about that growth rate continuing into next year?

Yes, yes. So infrastructure, as you know, Ross, I mean, been a big driver for us. We've been investing heavily in this segment. We think it's a big market opportunity for our optical products as well as our 5G access products. This year, infrastructure is going to grow more than 50%, on track to see that and encouraging, right? I mean we've been below $100 million. Now you've got this well north of $100 million. And I think even going -- even after a 50-plus percent growth this year, now you're going to see another double-digit growth next year because we -- frankly, a lot of that growth this year, we've got some new products, so backhaul, for example, the modem has been a big contributor. But we've also got the transceiver that's really just started to ship in earnest kind of mid this year. That will continue into next year. High-performance analog, some of our server power management solutions are ramping really well this year. That will continue again in '22 as well. And then you've got, to your point, the 5G access. So 5G access just started in Q1, moved into production. We saw our first revenue -- production revenues in Q1. Expect that to continue to grow sequentially throughout this year and into '22 to be a much more meaningful contributor. And then the Optical business as well. Optical start to ramp into production in Q4 of this year and then growing throughout '22. So all of those factors really factor into why we are confident that we'll see a nice double-digit growth next year as well.

So what -- if I -- that business has long sounded great. And it's amazing to see this year, it's delivering on some of the promises. What's been the headwinds of it in the prior couple of years? And why do you not worry about those repeating themselves in the next couple of years?

Well, so some of it is -- I mean, some of it is just size and scale, right? So as it's gotten bigger, then the volatility is not as bad. Some of the backhaul stuff was driven by new products that just were -- took longer to ramp. Infrastructure customers are notorious for taking longer than what's expected. And so that's a part of it. And then the -- on the 5G access side, I mean we came to market more or less in line with what we had talked about previously. China has definitely been a slowdown. I mean to your point, on the trade war side and some of the dynamics around Huawei. That has been challenging. That -- we also sell into or have sold into Huawei historically on the backhaul side. So that added to some of the lumpiness in 2020 and even that started late '19. If you recall, the trade -- the tariff situation started in late '19. So the tariffs played into that lumpiness in '19 and '20. And that's kind of -- I mean, all that Huawei stuff has been pulled out, and so that's why it gets less lumpy, if you will, to your question specifically. And then I guess the last piece, I mean, it wasn't a headwind per se, but the 400-gig PAM4 has taken longer. Just the end customer, in this case, your largest data center guy in the world, just took longer to ramp as well. So yes, I mean these things are always frustrating, but once they get going, it's usually pretty good times.

Yes. Well, it's good to see that it's definitely rolling now. The last end market we haven't talked about was your industrial -- or is your Industrial and Multi-market. It's about 15% of sales as well. I know that's a very fragmented business, base business, good cash flow generator, et cetera. If you think about the growth rates there, is it just as easy as thinking, yes, pretty much what the analog market growth is as good an assumption as any, or are there some MaxLinear-specific tailwinds that we should appreciate?

So I think right now, I mean, we've been pleased to see this recovery happen. I think it is -- I think for right now, we should just -- your expectations are correct, and this kind of should grow with what the analog market is growing. Where we're investing in analog and power management, for example, where you'll see bigger growth, at least from a technology standpoint, is really more on some of the infrastructure side. And even to some degree, the broadband and connectivity side, where that analog were focused on taking power management into a remote radio head, for example. Those are the places that we're spending most of our time and technology resources from an investment side. Now like point-of-load regulators is an area that we've sold into the infrastructure market. Now those products can all be sold into the industrial multi-market and grow nicely. Ethernet solutions that we sell into our connectivity solutions can easily go into industrial multi-market and grow nicely. And so we would expect to see some of those drivers contribute, but the outsized growth will be seen in those other end markets.

Got it. So why don't we go over to the margin side of the equation, both the gross and operating margin side of things. Your gross margin has done really, really nicely, especially given the tail -- well, the headwinds at the time from the Intel Home Gateway acquisition. Have you gotten that up to the target gross margin range? I think you talked about wanting to exit this year, if I remember correct, around a 6 handle in that business. Are the tailwinds from that on schedule?

Yes. So you're right. They are ahead of plan. We have been able to get -- so the Intel business was definitely lower gross margins, and that was one of the challenges that we talked about. Despite the environment we're in with the supply dynamics, we have been able to get to that 60% consolidated number about 2 quarters ahead of time. So that's good. I am encouraged. I mean, we're seeing a lot of good signs on the gross margin side. Some of that came through pricing, some of it came through cost reductions, headcount, efficiencies. We do expect to see more of this, and frankly had expected to be able to make more progress. But given the supply chain issues, it's been difficult to bring up new suppliers or move to another foundry or move to a different back-end supplier just because everyone's full, right? And so that's taken a little bit more time, but by no means to have those opportunities gone away. We absolutely intend to follow through on that. So I do expect to see continued improvement. Depending on the supply chain dynamics, I mean, how fast can we see those improvements, we'll somewhat be a little bit constrained until we see some of that capacity ease a little bit so that we can move. But once that happens -- and I do expect to see continued improvement next year. The other things impacting gross margins, the mix is definitely playing a role. Pricing is playing a role. Those are all things that we had. Pricing, for example, is something that we felt we could do better on. What I mean by that is it felt like Intel had kind of underpriced the market to some degree. So those -- some of those were actions we're taking earlier or late last year, earlier this year. And so the pricing environment is good. I do feel like, for the most part, where we're seeing price increases, we can pass these along to the customer. So all-in, gross margins feel good. I don't see any reason why this business can't run up in the mid-60s. I mean, MaxLinear historically ran 63%, 64%. Intel was running in the 40s. It's going to take us some time. I mean I'm confident that our road map can get us up to that level. I'm confident that as we move products around into new foundries, that we can make improvements there. So -- but it will take kind of 18, 24 months to start to see some meaningful increases.

And is there a distinct hierarchy between your 4 segments by gross margin? Or is it really dependent upon what the -- what mix changes are occurring within those segments in any given quarter?

I mean we've talked historically, infrastructure is pretty good gross margins as you would probably expect. So infrastructure is slightly higher. But really, the bigger dynamic is probably what we just purchase from Intel rather than necessarily the mix of end markets. And so where Intel products are, like in connectivity and broadband, is where you see a lesser gross margin. But I don't think that -- but I think the opportunity to make those improvements are absolutely there. There's no reason it should be running well below. I mean, I think we can make some nice improvements going forward.

Got it. Last 2 questions. Anything crazy happening in OpEx going forward? Your operating intensity has dropped significantly as the revenue growth has occurred. And I know that's always the plan when you have big new products you're investing in and when the revenues come then you'd lever it. But at times, Kishore likes to use that to invest in the next big leg of growth. So anything wacky happening with OpEx that we need to think about in the next year or so?

No, no, not really. I mean, I think -- I think most everyone is familiar. I mean, I think we do a pretty good job on the OpEx side. As I look forward, there really shouldn't be anything crazy. We'll see increases. But I think it's probably -- we're starting to get to a place where we kind of grow OpEx at about half the rate of the top line. And so I think you should see nice leverage in the model going forward. I mean we've said all along that kind of post this acquisition, we felt that the combined company can get up north to 30% and above. And it takes a little bit of time. I mean we've kind of comped with some of the Broadcom business as they run this at 40%. I mean we don't have that scale, but we definitely see the ability to get it above 30% as that OpEx -- some of those needs kind of moderate a bit, right? I mean we've still got WiFi investments, optical investments, 5G. But a lot of the big IP development efforts have been done. And so they're not as intensive, and you've also got revenue ramping there as well. So all in, I think I do see a very good path to the 30% op margin target.

So last question for you in the last minute we have. The use of cash. You guys have been selective and opportunistic acquirers in the past. Obviously, nothing as big as the Intel one, at least from a revenue perspective. Are you still in digestion mode for the foreseeable future with some of the buyback that you've approved being the primary uses? Or are you still on the prowl for deals?

Yes. I mean, look, I think we're still -- I mean, look, acquisitions are very much part of the playbook and will continue to be part of the playbook. I think scale matters a lot. So I definitely want to do that. I feel like we've got the integration complete. Look, there's nothing imminent, but we're definitely kind of outlooking. I think they're relatively expensive, but -- especially on the private side. But we're looking. We'll look at carve-outs again like the Intel side and also stand-alone companies. But we'll also continue to pay down debt. I mean, cash flow is improving nicely. And so we've got this excess cash. We'll continue to pay down debt. We did authorize the $100 million buyback, and we're absolutely going to continue to work on that as well.

Perfect. Well, Steve, thank you very much for your time. We are at the end of the allotted slot. So I appreciate it. Congratulations on a great year for MaxLinear and looking forward to seeing that strength continues into 2022.

More to come, more to come. All right, Ross. Thank you very much. We appreciate the call.

Great. Have a good one.

All right. See you.